Wednesday, July 30, 2008

French Utility companies Suez and Gaz De France (GAZ.PA) Merge Creating Europe's 2nd Largest Electricity and Gas Group

French Utility Companies Suez (formerly SZEZY) and Gaz De France (GAZ.PA in France) have merged to form Europe's 2nd largest Electricity and Gas Group. French Nuclear Power Group EDF (EDF.PA) is the first.

The new company is GDF Suez ( is the United States ADR).

Suez had been known as a good French Utility with good exposure to Water and Waste Management. However, the merger agreement says there will be a spinoff of 65 percent of Suez's water and waste management arm through a market listing.

With the merger, Eruope's natural gas sector will be firmly dominated by a handful of players including Gazprom of Russia, E.ON of Germany, Eni of Italy, Gasunie of the Netherlands and Norsk-Hydro of Norway.

The longer term stock chart of the original GAZ.PA looks good as the stock has gone steadily up since the 2005 IPO. The stock as of July 30, 2008, is also above the 200 day moving average.

Monday, July 21, 2008

Much Time is Needed Before Housing Can Recover

According to a recent survey, the top two obstacles to owning a home are (1) High Home Prices and (2) High Down Payments.

High Home Prices

Despite Home Prices continuing to fall, home prices are still too high.

Here's the Standard and Poors (S&P) Case-Shiller 10 City Composite Index since 1987:

Notice the dark blue line and the parabolic pattern reminiscent of the 2000-2002 Bubble.

The magenta line is the one year moving average of the Composite 10 index. If the Composite 10 index is above the One Year Moving Average, Housing Prices are in a Bull Market. If the Composite 10 Index is below the One Year Moving Average, Housing Prices are in a Bear Market. This is currently the case.

Still Unaffordable

According to a study looking at California Home Prices, many counties have incomes that are 50% of the income needed to afford the median priced home.

Previously, before the recent Credit Crunch, people were able to "afford" the homes based on loose underwriting standards, exotic mortgages, low promotional interest rates, and other adjustments. We are now experiencing the downside to this trend.

High Down Payments an Obstacle

Because of the recent Credit Crunch, Lenders have tightened lending standards. According to some, many people are trying to get financing, but they can't. Higher down payments are needed to buy homes now.

But how can these people afford the down payments when gas prices remain high, food prices remain high, the stock market is in a downtrend.

When combined with home prices remaining high and unaffordable, it will take some time before the housing market recovers.

Housing Annual Returns

According to Robert Shiller, author of Irrational Exuberance, and the Shiller in the Case-Shiller Index, from 1890 to 2007, the return on residential real estate was just about zero after inflation. Since 1987, it's been about 6 percent.

Robert Shiller also makes the case that if residential real estate returned 10 percent per year, houses would remain incredibly unaffordable.

In the Original Case-Shiller Composite 10 Index Chart above, there are two lines assuming 3% or 4% annual growth since 1987.

Future Housing Boom?

Is there hope for the future? Is there a future housing boom?

The stock market and the economy will eventually recover. Foreign investors, taking advantage of the cheap dollar, could start investing in U.S. properties.

Demographics will fuel the Next Housing Boom

But the real boom may be pushed by demographics.

Three major demographic groups include:
  1. Baby Boomers (est: 1946-1964; 44 to 62 years old): 70 million
  2. Generation X (est: 1965-1979: 29 to 43 years old): 17 million
  3. Generation Y (est: 1979-1994: 14 to 29 years old): 60 million

As you can see, Generation Y comes close to the large Baby Boomer Demographic.

One of the major booms since 1890 (according to Yale Economist Robert Shiller), occurred after World War II as the demand for homes increased. This boom coincided with the boom of the Baby Boomer Generation.

Now, Generation Y, 2nd in size to the Baby Boomer Demographic, is going to be the right age to start families and buy homes. This might be an event similar to the era right after World War II when the Baby Boomers were growing up.

If we estimate that Generation Y would start buying homes between 26-29 years of age, then that would mean that greater number of Generation Y would be of age within around eight years from now.

After a lengthy period of time for the economy to recover, and for housing prices to stabilize or decline to a more stable and affordable level, there could be a future housing boom as Generation Y starts to buy homes.

Wednesday, July 16, 2008

Are Large Cap Consumer Staple and Health Care Stocks Really Recession Proof?

A recent poster on this blog commented on the "Anti-Recession Stocks that can survive a US Slowdown" blog post. The poster said:

Well you were most certainly wrong. Too bad folks like you can't get out of the mindset that just because a company is big and been around a while doesn't mean it's stock will do well.

Let's evaluate the stocks chosen in the previous blog entry to see whether or not the stock selection was wrong. The assumption is that large consumer staple and health care stocks tend to survive slowdowns and recessions.

Assumption: Sector Rotation

But first, let us look at an assumption. Let us assume that a portfolio is 100% in stocks, and whether the market goes down or up, the portfolio manager (you) has to remain 100% invested. In this case, we have to either hold the stocks we currently own, or we have to rotate into other stocks.

Many professional money managers have to do the same. They are supposed to maintain a percentage of their fund in equities, and when the market goes down, they could rotate stocks from one sector to another.

The Slowdown/Recession playbook tells us to rotate into large cap consumer staples and health care stocks as a safer investment to ride out the slowdown or recession.

With this assumption in mind, six stocks were selected in the previous blog post that were "anti-recession." Most are large cap, consumer staple or healthcare stocks, except one, Sun Healthcare (SUNH) which is a small cap health care stock.

Performance of the Stocks

From January 7, 2008 (around the time the previous blog entry was written) to today, July 15, 2008, here is the performance of the stocks:

  1. SPY (S&P 500 ETF): -13.47%
  2. PG (Procter and Gamble): -10.27%
  3. UL (Unilever): -25.97%
  4. MO (Altria): -11%
  5. GILD (Gilead): +15.28%
  6. SUNH (Sun Healthcare): -17.71%
  7. PEP (Pepsi): -14.2%

All of the results above do not include dividends. If you include dividends, the performance of the stocks above would be better.

In addition, instead of choosing SUNH, we had chosen it's competitor, Kindred Healthcare (KND), the return during this period of KND would have been +20.16% instead of SUNH's -17.71%

The Results

Period: January 7, 2008 to July 15, 2008:

Average of the Six Anti-Recession Stocks (no dividends): -10.65%
S&P 500 Performance: -13.47%

The Six "anti-recession" stocks outperformed the market by almost 3%. In this difficult bear market, outperforming the market is a good thing.

Check Performance Now

Biotech has been breaking out

Thursday, July 10, 2008

Activision Blizzard Merger Completed (ATVID).

The Merger between Game Software Maker Activision (formerly ATVI), maker of the very popular Guitar Hero and Call of Duty, and Blizzard, maker of the popular online role playing game World of Warcraft, has completed.

The new ticker symbol for Activision Blizzard is now ATVID.

The ATVID stock rose 5.44% to $31.77 per share.

As we previously blogged, Activision-Blizzard has a bright future.

Monday, July 7, 2008

Biotech Breakout?

Over the past several trading days, we noticed that there is positive activity in the bio tech sector.

Amgen (AMGN), over the past four trading days has gone from $47 to $50, a gain of around 6%. The stock has broken out above the 200 day moving average too.

Celgene (CELG), over the past four days has gone from $64 to $69, a gain of around 8%. The stock has broken out above previous resistance levels and is solidly above both the 50 and 200 day moving average.

Genentech (DNA), had broken out, but a recent NY Times Article knocked down the stock today. However, on today's CNBC Mad Money Show, Jim Cramer pushes the Genentech stock and is bullish on bio tech at this part of the cycle.

Gilead (GILD) has shown some recent weakness, but the stock is still above the 200 day moving average and is within 9% of the 52 week high.

Thursday, July 3, 2008

Expected Stock Market S&P 500 Bottom using Long Term (8 year) View and 50% Retracements

Many people are saying that the Stock Market (as represented by the S&P 500 index) is in Bear Market territory, being down over 20% from it's recent high of 1576 (today, the S&P 500 is at 1261. The annotated chart above is from March 2008, but it still shows important levels).

Where's the bottom?

In technical analysis (analyzing the stock charts), there's a school of thinking that uses Fibonacci Retracements. In nature and in the stock market, the ratios of 61.8%, 50% and 38.2% are important levels. If we take any uptrend or downtrend in the stock market, if we look at the retracement levels (the levels at 61.8%, 50% and 38.2%), these levels often coincide with resistance and support levels.

On March 24, 2000, the S&P 500 hit an intraday high of 1552.87. During that last bear market, the S&P 500 then lost almost 50% of it's value to an intraday low of 768.63 on October 10, 2002.

The most recent high today was set around with an intraday high of 1576 on October 11, 2007.

Over the last several months, the S&P 500 bounced nicely around the 1270 level, which coincides with the 38.2% retracement from the lows of 2002.

Now, it would appear that the S&P 500 could go lower. The 50% retracement from the 2002 S&P 500 lows would be 1172, and 1077 would be the 61.8% retracement.

Looking at the chart above, we also notice a lot of congestion from 2003 to 2006, in the range between 1077 to 1267. This is a good sign that we could find stronger support in this region.

Maybe 1077 could be a good lower target on the S&P 500.

In addition, many sources claim that the average bear market decline is 30%. If this is so, then a 30% decline from 1576 would give us an S&P index value of 1104, very close to the 1077 S&P 500 61.8% Fibonacci Retracement.

The S&P 500 longer term bottom looks to be around 1077 to 1172 based on the scenario above.

Of course, we can monitor the situation of the S&P 500 at each support and resistance level.

Today's S&P 500 Chart, Long Term View

Today's Three Year S&P 500 Chart

Original Article which used the Annotated Chart Above

Tuesday, July 1, 2008

Should we Blame Speculators for High Gas Prices?

Many politicians and people are blaming speculators for the High Gas Prices. Should we really blame the Speculators?

In a previous episode of Mad Money, Jim Cramer does not mention speculators as one of the reasons for high gas prices.

In an interesting article by a Senior Writer (Jon Briger) at Fortune magazine, the writer makes a case for not blaming the speculators.

Two of his points:

  1. If our representatives did understand the oil markets, they'd know that the true telltale sign of a speculative bubble is not rising trading volumes but rising oil inventories. Speculators would be hoarding oil - building up inventories either in anticipation of higher prices or as part of a scheme to drive prices there. Yet according to the Department of Energy, U.S. oil inventories are now at below-average levels. U.S. oil stocks stand at 309 million barrels, versus 330 million in June 2005.

  2. There's something else politicians conveniently overlook: futures trading requires two to tango. For every investor who is betting oil prices will go up, there also needs to be an investor willing to take the opposite side of that bet.

    In the past, there have been times when the overwhelming majority of speculators were "longs" betting on higher prices, while their commercial-trader counterparts - i.e. traders working for oil refiners, airlines, and other end-users of oil - were the "shorts" betting prices would fall.

    But as New York Mercantile Exchange Chairman James Newsome explained to Stupak's Congressional committee, today's speculators are evenly split between shorts and longs. Moreover, the percentage of futures contracts held by speculators (as opposed to commercial traders) "actually decreased over the last year," Newsome told the subcommittee, "even at the same time that [oil] prices were increasing."